Is NOW a good time to sell?

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With the uncertainty that permeates the media these days, many may be wondering if now is a good time to sell their commercial real estate. After all, interest rates are roughly double what they were just a year ago, rabid investor appetites have moderated, world turmoil persists and there is in again some rumbling we could recede later this year? Remember, you heard it here first in January - I believe we’ll avoid a recession - but I digress. To the question de jure. Is now a good time to sell? My answer is - it depends. Allow me to expand. 
 
In the universe of sellers there exist three types - equity, non-equity, and distress. Daylight appears between the market price  of a property and any debt owed in an equity situation. The reverse is the case in a non-equity circumstance. However, not all non-equity sellers are in distress and some distress sellers still have equity. 
 
Equity seller. A property owner with equity views their situation as a “I don’t have to sell”. But. Is their equity earning the type of return it should? I spoke to a private investor last week. He’s owned and operated an industrial property since he bought it in 1998. He owes very little - which means a large pool of equity resides. He’s facing a maturing mortgage. He can refi the underlying debt, pull out some cash and the property will still cash flow - provide income after the mortgage is serviced. But is that the right move? With the rampant appreciation experienced since he acquired the property and only moderate rent growth - the return on his equity is skimpy. When I explained what sort of return could be achieved by selling today and redeploying his equity via a tax deferred exchange - he was intrigued. He can’t sell for early 2022 pricing but won’t have to buy at 2022 pricing either. There is a trade off. Sellers who occupy buildings with their companies generally are guided by business motivations - vs real estate market conditions. Specifically, if more space is needed and the residence will become excess - a selling decision might be made. Because the proceeds will be funneled into the next buy - less emphasis is placed on extracting the highest dollar amount - and more on certainty of close. 
 
Non-equity seller. Those that purchased in late 2021 and early 2022 with 90% small business administration financing could presently be a non-equity owner. With the price softening this year coupled with maximum leverage from last year - chances are no equity remains. An aggressive loan repayment or a rampant run up in pricing can remedy the imbalance. Given this scenario - I’d suggest holding unless some distress appeared.  
 
A seller in distress - equity or non-equity. In the non-equity example above, should loan repayment be required, distress emerges. Now this owner may find his only recourse is to sell - at the best price attainable. Certainly, refinancing the debt could be an option but with no equity - lender alternatives will be limited to non-existent. Because this is a forced sale of sorts - market conditions are secondary. The seller must do the best he can under the circumstances. 
 
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104. His website is allencbuchanan.blogspot.com.